Forces Analysis Wellpoint Is Subject

¶ … Forces Analysis

WellPoint is subject to impacts from many different environmental factors. The health care coverage industry is not considered to be cyclical, but rather subject to several other key demand drivers. These include government regulation, demographic shifts, social factors, technology changes and other factor. No one factor dominates the industry, but each has an impact and must be accounted for by WellPoint's management.

There are few economic variables that impact WellPoint's business. The industry is not cyclical and is subject to demand drivers that are largely unrelated to macroeconomic circumstances. That said, there are a few ways in which macroeconomic factors can affect WellPoint. One is that the overall health of the economy affects the ability of corporations, especially small businesses to provide health care for their employees. Individual WellPoint customers may also face decisions regarding their health care coverage than can result is a slowdown in business during tough economic times. Even large corporate customers can see a reduction in sales if they are forced to reduce the size of their workforces. This can result in a reduction in demand. WellPoint is moderately vulnerable to economic downturn by virtue of the fact that they are relatively concentrated in a handful of geographic regions. This lack of geographic diversification means that WellPoint bears some economic risk.

Another economic variable is with regards to WellPoint's investment portfolio. The company is exposed to capital markets through this portfolio. Therefore, when markets decline, WellPoint may either sell securities at a loss or a reduced profit. They may also be unable to derive strong returns from their portfolio is poor economic conditions. Therefore, WellPoint is moderately exposed to economic risk, even though they operate in a non-cyclical industry. Additionally, if financial markets are depressed, this can impact WellPoint's ability to raise investment capital for expansions or acquisitions. Also, the condition of the financial markets can increase or decrease WellPoint's cost of capital, which can also affect capital budgeting decisions.

WellPoint is more exposed to legal and regulatory risk. There are two main components to this type of risk. The first is that regulatory changes can affect their market potential, their service offerings and other variables. The Obama election platform, for example, contained several changes to national health care policy that will impact on WellPoint's business. Several states are also reviewing their health care systems. Changes in coverage policies can be either positive or negative for WellPoint. Another way in which WellPoint is affected by the regulatory environment involves Medicare and Medicaid. A significant portion of WellPoint's business is derived from these programs, but they are funded at the federal and state levels. Therefore, the amount of money WellPoint can earn from those programs is related in part due to decisions at the governmental level regarding funding levels for these programs.

WellPoint also bears a significant amount of legal risk. The health care industry is subject to significant risk of legal action. This may include everything from failure of WellPoint to adhere to the complex regulations concerning Medicare/Medicaid to human resources-related legal action to malpractice risk. The company uses insurance in order to hedge their exposure to these legal risks but the health care industry is subject to litigation in many forms from many stakeholders. Some recent judgments appear to have increased exposure of industry players such as WellPoint to litigation risk.

WellPoint's operations are also subject to influence from societal values and lifestyle choices. These can have either a positive or negative impact on WellPoint's business. There are many ways in which societal values can impact WellPoint. One is with regards to public sentiment regarding health care coverage providers or the health care industry as a whole. As the federal and many state governments are evaluating their health care strategies, the potential impact of public sentiment has increased in recent years. At present societal values appear to remain in favor of privately-provided health care options, which is positive for WellPoint.

Lifestyle choices are a strong demand driver for WellPoint. The company's inflows and outflows are subject to the demand for health care services. Societal values regarding lifestyle choices can result in increases or decreases in the amount of health care people need. The foods that people choose to eat, the amount of exercise they get, the percentage of smokers and other broad, societal lifestyle factors all have a significant influence on the health care business.

WellPoint is also subject to influence from technological shifts. Many parts of the health care industry are subject to rapid technological advancements. These can impact the range of product/service offerings available to WellPoint. New technology can dramatically reduce the cost of health care, thereby lowering WellPoint's costs. Technological shifts can also impact the societal environment, by shifting lifestyle factors, such as diet and exercise.

Another way in which technology impacts WellPoint's business is with regards to information technology. WellPoint can derive significant cost savings and customer service improvements from superior information technology, as can their competitors. Advanced it systems can allow for greater control and management of the business, and better communication with staff and other stakeholders. The company has yet to significantly leverage the possibilities that it offers it, but new CIO Lori Beer has made this a priority in coming months and years (O'Donnell, 2008)

Demographic trends a major demand driver for WellPoint. On average, as people age their health care requirements increase. There are also significant correlations between health care demand and income, race and other key demographic variables. Shifts in demographics can have either a positive or negative impact on WellPoint's business. The demographic environment is especially important for WellPoint because they are only somewhat diversified geographically. If they were nationwide, favorable demographic shifts in one region could cover unfavorable shifts in other. However, WellPoint's lack of geographic diversification leaves them exposed to demographic shifts.

Competition

Competition in the health care insurance industry is intense. Supplier power is high. Health care providers have a high degree of control over the cost structure of the industry. Insurance companies can assist with negotiation or they can choose between providers, but providers are reasonably concentrated in each geographic region. There are also switching costs associated with an insurance company switching their choice of preferred providers. Supplier information is strong, which increases their leverage.

Buyers have moderate power. They have little control over the offerings of the insurance companies, but many have the ability to switch providers, at least periodically. Employers have lower switching power due to the high cost and logistics of switching. Buyer information is weak, however, which decreases their leverage. The average American consumer knows more about, for example, cars or television sets than they do about health care. There is only a low-to-moderate amount of differentiation in the industry and consumers often do not understand the differentiation very well.

There are high barriers to entry. The insurance business is heavily regulated, and there are many players in the industry. There is a high proprietary learning curve as evidenced by the fact that most of the industry's main players operate almost exclusively in the health care sector. Government policy encourages competition but the regulatory environment is complex, which discourages new entrants. There are high capital requirements and low initial access to distribution.

There is minimal threat of substitutes. Substitutes to private insurance are paying out of pocket, Medicare and Medicaid. The latter two are government funding and have certain sets of requirements. Buyers have a low inclination to substitute, derived from a perception of low differentiation between insurance companies and the sometimes onerous paperwork involved. There is a price-performance tradeoff with regards to the out-of-pocket substitution option, but for most buyers the threat of hospital bills in the thousands of dollars results in a lack of desire to utilize this option.

The degree of rivalry is intense. The ongoing obligation faced by firms in the insurance industry with regard to their claims is a very high barrier to exit. Moreover, most firms in the health insurance industry operate mainly in that industry, not even in other areas of insurance. The industry is not concentrated, but the firms lack significant points of differentiation. This low diversity of rivals increases competitive intensity. The industry is not seeing strong growth, and margins are being squeezed by rapidly rising health care costs.

Overall, the industry is profitable, but it is also subject to moderate-to-intense competition. The lack of differentiation, the high barriers to exit and relatively high barriers to entry mean that the existing firms must battle it out for share of a market that is not growing quickly. The suppliers have high power, which gives the industry an unfavorable cost structure. However, the buyers have only moderate power. WellPoint illustrated this when after a rough Q1 08 they stated an intention to raise premiums in order to cover increasing benefit costs (Hamilton, 2008). They have been able to do this, resulting in a steady decrease in BER in the past six months.

Current Strategy

WellPoint's current business level strategy appears to be a mix between cost leaderships and differentiation. They are striving to be the best of both worlds. In their heavily regulated industry, there is a relatively high degree of commoditization between different health care plan offerings. There is high intensity of rivalry in the industry as well. This intensity of rivalry pushes down costs, but the cost structure of the industry is fairly rigid, such that it is difficult for a health care plan provider to fully engage a cost leadership strategy. Consumers are demanding both low costs and superior product offerings. WellPoint is attempting to meet these conflicting demands to their best of their abilities.

This strategy stems in part from WellPoint's position within the industry. The industry itself is relatively fragmented, despite significant barriers to entry. WellPoint is the #2 player in the industry, behind the United Health Group. WellPoint holds at 9.75% market share. Other competitors are Aetna, Humana, Kaiser, and many smaller firms. The industry is heavily fragmented, with the top ten firms accounting for less than 50% of the market share (Insurance Information Institute, 2008). WellPoint's large size, strong competition and the industry's heavily regulated nature essentially remove the differentiation option. Yet, skyrocketing health care costs remove the low cost option. The industry is struggling along with WellPoint as firms within the business attempt to find a balanced position, as a matter of business strategy.

WellPoint's financials are solid, but have seen deterioration recently. The company grew premiums 7% in 2007. The company had seen an increase of 27.7% in their premiums in the previous year as they built upon their recent merger with Anthem. The increased investment income 14% in 2007, building on a 38.8% increase the year previous. The companies benefits paid out grew at 9% last year, faster than the growth in premiums. This resulted in an increase in the benefit expense ratio from 81.2% to 82.4%. Selling and administrative expenses, however, declined last year as a result of synergies from the merger. The decline was from 15.7% to 14.5%. Overall, WellPoint recorded an increase in net income of 8% over 2006. The increase in net income for 2006 was 25.6%.

In 2008, however, WellPoint has struggled to maintain their success. They are on track for modest improvements in revenue, but their benefit expense ratio had risen in the early part of the year. The first quarter BER was 85.9%. This has been reduced to 83.3% in the third quarter, but the level is still higher than it was last year. WellPoint has also seen declines in its investment income as well and is on pace for a double-digit percentage reduction in investment income. As a result, the company's net income is on pace to fall below 2006 levels.

The company's balance sheet has also deteriorated over the course of this year. Total assets have fallen from $52 billion to $49.7 billion in the past nine months. Total liabilities have fallen by about $1 billion in the same time frame, but have been increasing over the past few years. Total liabilities are currently $28.085 billion compared with $26.999 billion at the end of 2006. The debt ratio has therefore increased from 52.3% at the end of 2006 to 56.4% at the end of Q3 08. The debt-to-equity ratio has gone from 1.098 at the end of 2006 to 1.295 at the end of Q3 08.

The company is for more heavily leveraged than their industry and sector peers.

SWOT

WellPoint has a few strengths from which they can draw. One is that they are large - the #2 player in the industry. This gives them increased leverage when dealing with suppliers. It also allows them to offer a wider range of product offerings and provide better service than many of their competitors. Another point of strength for WellPoint is that they have a well-established brand in the industry. When they merged with Anthem, they kept the WellPoint brand because of its strength and good reputation. This gives it an advantage in marketing, as buyers will gravitate towards larger, more established insurance companies.

WellPoint's weaknesses at present are mainly financial. They have seen a deterioration of their financial position over the course of the past year. They have seen a reduction in liquidity and an increase in their benefit expense ratio. WellPoint will need to control their benefit costs and shore up its balance sheet. Failure to do so will leave the company more exposed to economic difficulty than its competitors and less flexible in terms of its ability to adjust to changing industry circumstances.

WellPoint has a couple of key opportunities. The first is that they can continue to build market share. The industry is heavily fragmented, which gives WellPoint the opportunity to build market share by exploiting weaker competitors. This plays to WellPoint's strength as derived from its large size. WellPoint has the option to grow through acquisition or from incrementally picking off competitor's customers through aggressive sales tactics, superior service offerings or leveraging economies of scale to offer products at a lower cost. Another important opportunity for WellPoint is geographic expansion. The company operates in a handful of states, and within some of those states only in certain counties. The result is that there is significant opportunity for geographic expansion. There are barriers to expansion, such as licensing and regulatory considerations, but WellPoint can overcome these either via acquisitions or by carefully selecting new markets in which they wish to enter.

WellPoint faces a diverse range of threats. One is the intense competition. The competitive intensity of the health care insurance industry is marked by high intensity, especially given the fragmentation. This intense competition has driven WellPoint to a business level strategy focused on both differentiation and cost leadership, a very difficult position to attain and retain. Another threat is the increasing cost of health care. Medical care items have increased in cost 45% in the past ten years and physician's costs have increased 32.1% over the same period. This compares with just a 27.2% increase in overall cost of living. That health care costs are escalating more rapidly than inflation represents a significant threat to WellPoint.